Happy November: CIT Files For Chapter 11 Bankruptcy

Too medium to fail? No. CIT files with "overwhelming" support of creditors. For some unclear reason, GMAC continues to get Chinese money via the U.S. Treasury but CIT gets something different: indifference.

In any case, here's the press release:

November 01, 2009 03:39 PM Eastern Time
CIT Board of Directors Approves Proceeding with Prepackaged Plan of Reorganization with Overwhelming Support of Debtholders

Nearly 90% in Favor of Plan; Emergence Sought by Year-End

Operating Entities Remain Unaffected and Highly Liquid

Continue Lending to Small and Middle Market Businesses

NEW YORK--(BUSINESS WIRE)--CIT Group Inc. (NYSE: CIT), a leading provider of financing to small businesses and middle market companies, today announced that, with the overwhelming support of its debtholders, the Board of Directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc. and a subsidiary that will restructure the Company’s debt and streamline its capital structure.

Importantly, none of CIT’s operating subsidiaries, including CIT Bank, a Utah state bank, will be included in the filings. As a result, all operating entities are expected to continue normal operations during the pendency of the cases.

All classes voted to accept the prepackaged plan and all were substantially in excess of the required thresholds for a successful vote. Approximately 85% of the Company’s eligible debt participated in the solicitation, and nearly 90% of those participating supported the prepackaged plan of reorganization.

Similarly, approximately 90% of the number of debtholders voting, both large and small, cast affirmative votes for the prepackaged plan. The conditions for consummating the exchange offers were not met.

Accordingly, CIT’s Board of Directors approved the Company to proceed with the voluntary filings for CIT Group Inc. and CIT Group Funding Company of Delaware LLC with the U.S. Bankruptcy Court for the Southern District of New York (“the Court”).

Due to the overwhelming and broad support from its debtholders, the Company is asking the Court for a quick confirmation of the approved prepackaged plan. Under the plan, CIT expects to reduce total debt by approximately $10 billion, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability.

“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” said Jeffrey M. Peek, Chairman and CEO. “We are enormously appreciative of the extraordinary support we have received from our many constituencies. This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence. I want to thank our customers for their support and express my gratitude to our employees whose dedication and hard work are crucial to the future of CIT. We also acknowledge our constructive working relationship with our regulators and look forward to their continued guidance as we move through this process.”

For more than 100 years, CIT has provided much needed capital to small business and middle market customers. These two sectors play a vital role in the U.S. economy and in overall employment and job creation, representing more than 90 million employees. CIT is the leading provider of financing to the retail sector and to women-, minority- and veteran-owned small businesses. Over one million customers depend on CIT to provide the financing needed to run their businesses. In addition to being one of the largest independent leasing companies in the U.S., CIT maintains the following leadership positions among others:

#1 factoring company in the U.S.;
3rd largest railcar lessor in the U.S.; and
3rd largest aircraft lessor in the world.
As previously announced, CIT expanded its $3 billion senior secured credit facility by an additional $4.5 billion on October 28, 2009. These funds, supplemented by cash generated from operations, will allow us to meet clients’ needs and to satisfy customary obligations associated with the daily operation of its businesses during the confirmation process. CIT has also secured an incremental $1 billion committed line of credit to provide supplemental liquidity as it pursues that plan.

In conjunction with today’s announcement, CIT has filed a number of first day motions that will allow it to continue to operate in the ordinary course during the confirmation process. These motions include requests to continue the payment of wages, salaries and other employee benefits. Additionally, the Company filed a motion seeking the necessary relief from the Court to pay its vendors and certain other creditors in full.

Under the proposed prepackaged plan of reorganization, all existing common and preferred stock will be cancelled upon emergence.

Treatment of Securities in Offers and Solicitations

The original CIT Group Inc. offers launched on October 1, 2009 have expired. Securities tendered in these offers will be released into their original CUSIP numbers as soon as practicable.

Securities tendered in connection with offers that have not yet expired, certain long-term notes maturing after 2018 and the Delaware Funding offers, are being retained in the CUSIP numbers for those offers; however, these securities can be withdrawn from the offers and returned to the original CUSIP number for trading. Any withdrawn securities can be re-tendered until the expiration date.

For Additional Information

Additional information about CIT’s restructuring can be found on the Company’s Web site, www.cit.com. For access to Court documents and other general information about the Chapter 11 cases, please visit www.kccllc.net/citgroup. The Company has established a toll-free Supplier Information Line at 800-422-2738 or, if you are calling from outside the U.S. 973-422-3877 and a toll-free Restructuring Information Line for all other interested parties at 866-967-1786 or 310-751-2686.

Evercore Partners and FTI Consulting are the Company’s financial advisors and Skadden, Arps, Slate, Meagher & Flom LLP is legal counsel in connection with the restructuring plan and Chapter 11 cases. Sullivan & Cromwell advised CIT’s Board of Directors on the restructuring plan and will act as legal counsel to CIT going forward on certain corporate matters.

Houlihan Lokey Howard & Zukin Capital, Inc. serves as financial advisor, and Paul, Weiss, Rifkind, Wharton & Garrison LLP serves as legal counsel to the Lender Steering Committee.

Individuals interested in receiving future updates on CIT via e-mail can register at http://newsalerts.cit.com

About CIT

CIT (NYSE: CIT) is a bank holding company with more than $60 billion in finance and leasing assets that provides financial products and advisory services to small and middle market businesses. Operating in more than 50 countries across 30 industries, CIT provides an unparalleled combination of relationship, intellectual and financial capital to its customers worldwide. CIT maintains leadership positions in small business and middle market lending, retail finance, aerospace, equipment and rail leasing, and vendor finance. Founded in 1908 and headquartered in New York City, CIT is a member of the Fortune 500. www.cit.com

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of applicable federal securities laws that are based upon our current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. The words “expect,” “anticipate,” “estimate,” “forecast,” “initiative,” “objective,” “plan,” “goal,” “project,” “outlook,” “priorities,” “target,” “intend,” “evaluate,” “pursue,” “commence,” “seek,” “may,” “would,” “could,” “should,” “believe,” “potential,” “continue,” or the negative of any of those words or similar expressions is intended to identify forward-looking statements. All statements contained in this press release, other than statements of historical fact, including without limitation, statements about our plans, strategies, prospects and expectations regarding future events and our financial performance, are forward-looking statements that involve certain risks and uncertainties. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results, and our actual results may differ materially. Important factors that could cause our actual results to be materially different from our expectations include, among others, the risk that the additional facilities do not provide the liquidity that CIT is seeking due to material negative changes to CIT’s liquidity from draw down of loans by customers, the risk that CIT is unsuccessful in its efforts to consummate the plan of reorganization. Accordingly, you should not place undue reliance on the forward-looking statements contained in this press release. These forward-looking statements speak only as of the date on which the statements were made. CIT undertakes no obligation to update publicly or otherwise revise any forward-looking statements, except where expressly required by law.


Contacts
CIT Media Relations:
C. Curtis Ritter, 212-461-7711
Vice President
Director of External Communications & Media Relations
Curt.Ritter@cit.com
or
CIT Investor Relations:
Ken Brause, 1-866-54CITIR (542-4847)
Executive Vice President
investor.relations@cit.com

GGP And The End Of Securitization; Threats Of Substantive Consolidation Gain Momentum

We have been watching the GGP bankruptcy evolve from a distance over the past several months for a variety of reasons. Prior posts have laid out Bill Ackman's long thesis on the bankrupt equity and Thomas Kirchner's rebuttal. Also lurking for several months have been the threat of substantive consolidation of GGP related entities. For those that have never heard of "substantive consolidation" and thus assume it is part of legal esoterica, you should understand it is the basis for the entire securitization market.

In essence, a securitization has historically been "bankruptcy remote" from its owner. This works in both directions, so to speak. In direction one (such as GGP's case), if the owner goes bankrupt, the remote entity's securitized lenders are protected and the bankruptcy has no impact on their ability to collect payments or takeover the underlying assets if the securitization began trigger relevant covenants. However, if the remote entity turned out not to be remote and were instead "substantively consolidated" with its bankrupt parent, the bankruptcy judge would have the ability to dictate terms and otherwise change the deal within the securitization, making it hard for the ABS lenders to get comfort they'll receive full value.

In the second direction of remoteness, the parent is protected from a default of the securitization. Basically, if TILB & Co. were to sponsor/create a mortgage securitization in which it owns the equity tranche (say, the bottom 5% of the structure) and fund the balance of the securitization with 95% debt (ABS), TILB & Co. stands to lose the money it put in the securitization and no more (making it "bankruptcy remote" from TILB's other assets). Substantive consolidation would change that and put TILB & Co's other assets that are outside that securitization at risk (e.g., if the collateral in the securitization did not cover the securitization's liabilities, the ABS lenders could come after TILB & Co's assets that are outside the securitization structure). In essence, substantive consolidation would take away the limited liability nature of securitizations.

This would of course end private securitizations forever and obliterate the balance sheets of most large banks and insurance companies.

An article from Reuters yesterday addresses the issue and GGP's attempts to utilize substantive consolidation in its bankruptcy proceedings.

General Growth keeps securities markets on edge
Mon Aug 3, 2009 2:45pm EDT
By Al Yoon

NEW YORK, Aug 3 (Reuters) - General Growth Properties last week, possibly in a shrewd negotiating tactic, said it may yet pursue a controversial strategy in its bankruptcy that could upset the legal basis for thousands of asset securitizations.

The second-largest U.S. shopping mall owner at a hearing said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies, according to a transcript of the hearing.

Potential for such a move is raising concern among investors because borrowing against commercial real estate and other assets is tied to the notion that borrowers are isolated from external events at a parent or other units. It is enough to sound alarms over the credibility of billions of dollars in bond agreements, even though a "substantive consolidation" is tough to achieve, analysts said.

"This was a surprising development that was probably saber-rattling on General Growth's part," said Daniel Rubock, a senior vice president at Moody's, who attended the hearing.

Chicago-based General Growth (GGWPQ.PK: Quote, Profile, Research, Stock Buzz) filed for bankruptcy in April after the credit crunch choked off financing for commercial property mortgages, challenging the company as it confronted maturities on billions of dollars in loans. It shocked analysts by naming some three-quarters of its 200-plus shopping malls in its filing, even though many of the corporate subsidiaries are in good shape.

Consolidating the special-purpose entities (SPEs) would hit at the heart of asset securitizations, which helped fund more than $600 billion for office buildings, apartments and shopping malls in 2005 and 2006. The threat comes as Federal Reserve and Treasury officials have focused on restarting lending to commercial properties in a bid to reduce the sector's drag on the U.S. economy.

Addressing concerns at a hearing last week, General Growth attorney Marcia Goldstein affirmed the judge's understanding that consolidation was not in court papers but noted the company needs to assess "inter-relationships" of the debtors.

"And one of the things we're looking at is whether there are some subgroups that should be appropriately substantively consolidated," Goldstein said at the hearing, and confirmed to Reuters on Monday. "We have not reached any conclusions on that at this point."

General Growth may be looking to negotiate a "global settlement" that rewrites all loans to easier terms with its creditors, said Richard Jones, co-chair of Dechert LLP's finance and real estate group.

What is more, getting a judge's approval for a substantive consolidation would be extremely difficult. Jones said. And the judge has "gone out of his way" to say that he does not expect proceedings to move in that direction, Jones added.

"It makes sense for the GGP counsel to mutter the words periodically to keep it at a low boil," Jones said. "It keeps the risk very clearly on the table." (Editing by Andrea Ricci)

As the author of Directive 10-289 (the best named blog in the blogosphere) said to us via email, "Novel bk strategies have been envogue lately but the Fed/Treas etc. do not want this Scud going off in the oil field. Talk about a credit crunch lingering a lot longer. whoa. If judge doesnt want to end up in Peoples Court he had better stick to his guns"

Chrysler Re-redux

After posting this reflection on the Chrysler creditor railroading Sunday, we received a follow-up email from our outsourced restructuring specialist - we'll call him Starting Tackle for giggles.

At the beginning of Sunday's reflection, TILB included a preamble that tried to put up the only possible argument we could conceive of in defense of The U.S. Treasury's sodomy of secured creditors:

I will offer the one counterpoint that I've heard to all of this that at least gives me pause. The counterpoint is that, in the end, all of the creditors accepted the re-org voluntarily (defining "voluntary" in the broadest possible sense). Further, while there has been outrage about the UAW receiving 55% of the re-org'd company as a junior creditor, they in fact did not receive 55% as a junior creditor; in essence, the U.S. Treasury received it and chose to give it to the UAW which is completely within their rights.

Starting Tackle responded to my Devil's Advocate argument with the below. It is fairly clear Starting Tackle knows more about this than we at TILB, so you should read and respect his voice.

A couple of points for [TILB] on the counterarguments that give [them] pause (I wouldn't lose sleep over them):

Not all the creditors accepted this voluntarily.

Chrysler is not a reorg, but technically a sale. As such, one must separate the interests that Treasury has/had in the Chrysler estate from the interest it will have in New Chrysler. Same goes for the UAW. The Chrysler estate and New Chrysler are separate and distinct entities. UAW doesn't get 4.6B note and 55% of the company because they were a junior creditor, or because Treasury gave the UAW a portion of their recovery from the Chrysler estate, (which as [TILB] points out, would be within their right to do). UAW gets this value because that's how "whoever" decided that New Chrysler should be capitalized. (This is the whole problem with this case - the fact that this is a "sale" and not a reorg allows for the manipulation of absolute priority because the "buyer" can capitalize itself however it chooses. The practical reality, of course, is that at these values there really is no "buyer" and so this is a sub-rosa plan that violates absolute priority.)

Under absolute priority Treasury is entitled to nothing for their third lien claim because the first lien isn't being paid out in full, to say nothing for the second lien held by Cerberus and Daimler. So Treasury can't be transferring value to the UAW based on their existing claim in the Chrysler estate - based on the purchase price being paid Treasury is an out-of-the-money creditor. That is why I said "I fail to see a contribution from the UAW that justifies receipt of a $4.6 billion note and 55% of the stock issued by New Chrysler". As far as I can tell, the UAW isn't paying dollars into New Chrysler for the note or the equity they are receiving in this deal - they just get it.

If this was a plan of reorganization, this wouldn't be allowed. Under a plan, the value of NewCo would have to follow absolute priority, or at least resemble it (since more senior creditors can take less than owed under absolute priority to buy off junior creditors and get a plan confirmed). If this was a real sale (or at least anything approaching fair value for the assets was paid), how Treasury chose to capitalize New Chrysler wouldn't be nearly as big an issue because New Chrysler would be putting fair value into the Chrysler estate in the transfer/sale of assets. That fair value would be distributed among Chrysler's creditors according to absolute priority. But because Treasury is paying so much less than FMV for the assets, the sale is really a sham and the value is just being handed to the UAW.

We will make two brief Devil's Advocate statements (everyone knows where TILB stands on this matter):

1) sure, not "all" creditors accepted this voluntarily ("voluntarily" defined in the broadest possible sense), but over 90% of secured creditors did and that is as close to "all" as can be practically hoped for; and

2) we would argue from a practical non-legal perspective, part of Starting Tackle's point is a distinction without a difference - whether The U.S. Treasury gets its shares then gives them to the UAW or simply proposes a plan that bypasses that intermediate step and simply grants the UAW its ownership without touching Treasury hands doesn't particularly matter in the end. Of course, the legal ramifications are another story as the path matters to The Law.

Now I must excuse myself; your humble author needs to go home and draw a hot bath. TILB must cleanse itself of its festering, soul destroying defense of public interference in private endeavors, even as a Devil's Advocate.

Wish me health.

------------------------------

Let us know your view on Starting Tackle's take on the abrogation of contract law and its ramifications on the cost and availability of future lending!

Reflections on Chrysler and the Adjustment of Creditors' Rights

In honor of GM's pending doom, what follows is an email forwarded to me from a friend of my older brother. He's an experienced restructuring expert. It takes a lot of the discussion surrounding the Chrysler "issue" and condensces it quite nicely.

Before we get to that, I will offer the one counterpoint that I've heard to all of this that at least gives me pause. The counterpoint is that, in the end, all of the creditors accepted the re-org voluntarily (defining "voluntary" in the broadest possible sense). Further, while there has been outrage about the UAW receiving 55% of the re-org'd company as a junior creditor, they in fact did not receive 55% as a junior creditor; in essence, the U.S. Treasury received it and chose to give it to the UAW which is completely within their rights.

Anyway, here's the excellent email I was referencing:

Friends,

I’m not sure if many of you have been closely following the developments in the Chrysler bankruptcy. As a restructuring professional, this is of tremendous interest to me and many others in my general line of work. Much has been made of one of the highest profile bankruptcies in history, especially the recent negative press surrounding a group of hedge funds and other lenders (collectively the Non-TARP lenders) that initially refused to accept the proposed pre-bankruptcy restructuring plan promulgated by Chrysler and the United States Treasury. Despite all the coverage, I fear very few people actually have a reasonable understanding of what is transpiring in the case. To a large degree I think the media is focused on the wrong aspects of this case. In light of that, I felt it was appropriate to share with you my views on this situation. Please keep in mind that these are solely my opinions and not those of my employer.

I believe the outcome in the Chrysler case is a national embarrassment and a major blow to creditor rights in this country. And while I’m sure the topic of “creditor rights” is not something near and dear to your hearts, creditor rights are incredibly important to the everyday mechanics of our economy. Anybody who borrows money to purchase a house or car, or uses a credit card, is impacted by creditor rights. The rights that creditors have against borrowers who cannot pay their debts are the underpinning of lending, and credit is the fuel of our economy.

I cannot understate my personal disappointment with what has happened in this case. While the proposed transaction is presented as a sale of Chrysler’s assets pursuant to Section 363 of the Bankruptcy Code, it is clear to me that this “sale” of Chrysler to “New Chrysler” is no sale at all but instead a sub-rosa plan of reorganization that violates the rule of absolute priority by providing a far lower recovery to secured creditors than they are entitled to under applicable law. Simply put, I believe the law is being subverted.

In terms of distributions of cash from the Chrysler estate, first lien creditors stand to get $2 billion in cash, or approximately a 29% recovery on their claim, while second lien creditors and third lien creditors (most notably the United States Treasury) receive zero recovery. It should be noted that Treasury injected $4 billion of TARP money into Chrysler on January 2, 2009 for that third lien claim. Within five short months, Treasury took a complete loss on that investment in terms of the recovery it will receive from the Chrysler estate.

It should also be noted that while secured creditors are significantly impaired, the Chrysler estate will be making significant levels of payments to a host of unsecured creditors such as vendors and dealerships that rank behind all secured creditors in terms of priority.

In order to consummate the purchase of the Chrysler assets and operate thereafter, New Chrysler will receive $6 billion in funded debt from Treasury in new senior secured debt. Aside from this debt, New Chrysler will also issue a note in an amount of nearly $4.6 billion to a Voluntary Employee Benefit Association (VEBA) of the United Auto Workers. The VEBA will also receive 55% of New Chrysler’s equity. Treasury and the Canadian government will receive 8% and 2% respectively.

While I am not advocating that Chrysler be liquidated, it certainly could be liquidated for more than $2 billion even under the worst assumptions, and generate a higher recovery for the first lien secured lenders. And if for some reason that wasn’t the case and the Chrysler assets are worth something less than $2 billion, then all of the following must also be true:

(i) It makes no economic sense for Treasury loan $6 billion to New Chrysler

(ii) Depending on the priority of the note in New Chrysler’s capital structure, the $4.6 billion note to the UAW’s VEBA may be worthless

(iii) At present, the equity to be held by Treasury and the UAW VEBA in New Chrysler following the sale must also be worthless

But the reality is that Chrysler is worth far more than $2 billion. Unfortunately, because of the way this transaction is being structured, the value of Chrysler that exceeds $2 billion is not being subjected to the typical waterfall of priority, where secured creditors are paid in full (beginning with the first lien lenders) before any significant recovery is provided to unsecured creditors. Instead, the assets of Chrysler are being stripped from the Chrysler estate for a price of only $2 billion, with a significant portion of that excess value flowing to unsecured creditors (most notably the UAW).

The Non-TARP lenders who hold first lien debt objected to this treatment, and in my opinion, rightfully so. In response to their protests, they have been repudiated by various members of the press and several politicians, including, most notably, our President. Rumors are rampant concerning a variety of threats that were levied at the Non-TARP lenders. Meanwhile, the other holders of Chrysler’s first lien debt, many of which received taxpayer money under TARP, have been lauded for consenting to this transaction. It strikes me as backwards to vilify those parties that are standing up for their rights under the law while other financial institutions, buttressed by taxpayer dollars, are so willing to consent to a far worse deal than they are entitled to under the law.

And try as I might, it is impossible for me to ignore the potential political ramifications of this transaction:
- Treasury is a multi-billion dollar secured creditor of Chrysler that will take a complete loss on the capital infusion it made into Chrysler earlier this year.
- Treasury has recently provided a multi-billion debtor-in-possession line of credit to Chrysler.
- Treasury was in the middle of all of the negotiations between Chrysler and the proposed “purchaser”, New Chrysler, and it would appear that Treasury had a significant role in arriving at the $2 billion purchase price paid to the Chrysler estate in return for Chrysler’s assets.
- Treasury is providing several billion in financing to New Chrysler.
- Treasury will have an 8% ownership stake in New Chrysler.

But the UAW, a huge political supporter of the current administration (and an unsecured creditor of Chrysler), somehow gets 55% of New Chrysler. I fail to see a contribution from the UAW that justifies receipt of a $4.6 billion note and 55% of the stock issued by New Chrysler when compared to what Treasury is receiving. However, I do see Treasury on all sides of this transaction with massive potential for conflicts of interest. One would think that with all these potential conflicts that Treasury would be steadfast in ensuring adherence to the law. Unfortunately that does not appear to be the case.

Given the fact pattern, I am inexorably drawn to a few depressing conclusions:

1) Treasury is orchestrating a public taking of the Chrysler assets from the Chrysler bankruptcy estate for far less than those assets are worth and transferring them (and their value) to a new entity which has as a principal stakeholder a union that is politically aligned with those who control Treasury.

2) It is unclear what it means to be a secured creditor if this kind of treatment can occur in bankruptcy.

3) This entire problem could have been easily avoided if Treasury and “New Chrysler” had just decided to pay a fair price for the Chrysler assets from the Chrysler estate and allow those proceeds to follow the applicable waterfall of absolute priority. Relative to the amount of money that has been spent or committed to date by the administration, paying an additional $10-15 billion is essentially a rounding error. One has to be very concerned that the administration would go to this degree of public trouble over an amount that could easily be otherwise swept under the rug. Which means…

4) They will do it again.

TARP-stuffed Lender Wells Fargo has the Gall to Oppose a Bid for BK'd Men's Clothier Hartmarx...

...a heavily unionized company that makes The President's suits, no less.

Wells believes a liquidation will recover maximum value. They seem to have forgotten that secured lenders have no rights.

Shockingly, politicians have decided to lean on their newly learned bankruptcy expertize as they opine on Wells Fargo's decision.

U.S. Rep. Phil Hare, a Democrat who represents the district that includes Rock Island, called Wells Fargo's statement "at best cynical and at worst deceitful." The bank misrepresented Emerisque's bid, Hare said.

Illinois Gov. Pat Quinn has said it is "only right and just" that Wells Fargo agree to a sale. Illinois Treasurer Alexi Giannoulias promised to cut off state business with the bank if it liquidates the company.

Right and just, indeed. How dare they decide how to pursue recovery from an asset they de facto control? Evil bastards.

Click here for more joy.